So much of the media attention for Energy Transfer Equity (NYSE:ETE) and its partnership subsidiary Energy Transfer Partners (NYSE:ETP) has been based on its longstanding negotiations to acquire Williams Companies (NYSE:WMB). This deal may be a significant event for Energy Transfer, but it isn't the only thing the company is working on today. For confidentiality reasons, management wasn't able to get into the update on the Williams deal, but it still had plenty of things to talk about that investors in these entities should know. Here are five quotes from management that will give you and idea of how Energy Transfer is looking at the company's current prospects and what it sees in the future of the pipeline space.
1. 2015 is a big growth year for us
Ever since shale drilling has taken hold in the U.S. and production of oil and gas has followed, pipeline companies have been on a mad dash to get as much of their new projects up and running to serve these new producing regions. After a couple of years of lining up projects and construction, 2015 is a year that we're seeing lots of projects come online, and Energy Transfer is no exception.
"We're now forecasting full year 2015 capex for ETP to be in the range of $5.4 billion to $5.8 billion. This includes Bayou Bridge. This is down approximately $200 million primarily due to the expected timing of the capex spend."
--Thomas Long, Energy Transfer Partners CFO
Also, according to Energy Transfer Equity, its other subsidiary, Sunoco Logistics Partners (NYSE:SXL), will finish up several projects by the end of the year as well.
"With Bayou Bridge pipeline, SXL's capex is expected to be between $2.4 billion [and] $2.6 billion."
-- Jamie Welch, Energy Transfer Equity CFO
With this much capital in new projects coming online throughout the rest of the year, it should significantly boost distributable cash flow for Energy Transfer Partners and Sunoco Logistics Partners. Since Energy Transfer Equity earns its money through distributions from these subsidiaries, it suggests that further distribution growth will follow.
2. We have another distribution increase for Energy Transfer Partners
There was a period after the 2008-2009 market crash where Energy Partners didn't grow its distribution payment to shareholders. At the end of 2013, it ended that streak with a distribution increase. For some longer-term investors, this period of no distribution growth was something they're probably going to keep an eye out for in the future. According to management, though, it appears that the distribution is still in pretty decent shape for now.
"Last week, we were pleased to announce the eighth straight quarterly distribution increase for ETP to $1.035 per unit, or $4.14 per unit on an annualized basis. This represents a distribution increase of $0.32 per common unit on an annualized basis or 8.4% compared to the second quarter of 2014. ... For ETP, DCF coverage ratio was 1.03. Since Q2, it's typically a shoulder period for the sector. We think this is a tremendous achievement, given the backdrop of the current commodity price environment."
As long as Energy Transfer Partners can execute on its growth plans, it should have the ability to continue its distribution growth.
3. We're initiating a buyback
Typically, companies in the pipeline space provide value to shareholders through generous dividend payments. They're able to generate those high yields because their cash flows are rather predictable on a year-to-year basis. What you don't see that often, though, is a company in this space repurchasing shares. It appears that Energy transfer will be bucking that trend, as Welch announced that it would initiate a rather generous share repurchase program.
"The additional cash on hand and balance sheet strength has allowed us to commence our $2 billion buyback program. And during the quarter of -- the second quarter of 2015, we've repurchased approximately $294 million of ETE common units. We will, of course, continue to be opportunistic in our continued purchases, depending on price and trading performance of ETE common units."
There are a lot of things that probably went into this decision, but some of the things that the company noted was that the general partner will receive adequate cash flows from the incentive distribution rights at its various subsidiaries to grow its dividend at a decent clip with some cash left over. With so much organic growth already in the works and the financing in place to achieve it, management saw a repurchase as the most effective way to deploy that capital today.
4. Is there too much pipeline in the pipeline?
Some analysts and investors have questioned whether the pipeline industry was building too much and that there was going to be overcapacity in the system. When prompted with this question from an analyst on the call, the response might surprise you.
"The pipeline business will overbuild until the end of time. I mean, that's what competitive people do. We've done it. Others have done it around us. And then you find yourself you must scavenge a product from others when you see volume declines. Then how do you do that? Well, you provide more services than your peers do. You provide more optionality. So this is something we'll always live through."
-- CEO Kelsey Warren
This is an interesting point to consider when looking at the pipeline space in the future. While it's entirely possible that too much transport capacity will get built in certain regions, the pipeline networks that provide customers with the options of multiple delivery points and storage capability will have greater value. So the benefit will eventually go to the larger pipeline operators.
5. We may be involved in the Williams deal, but it's not the only thing we're looking at
Energy Transfer Equity recently announced that it had entered into Williams Companies' strategic-alternatives process, which basically means that it won't engage in a hostile takeover of the company while Williams' management looks at their options. Even though Energy Transfer would have a lot of capital tied up in this acquisition, the company is confident that it isn't done making deals. In fact, we heard that that it;s already exploring other acquisition targets.
"[A]t any given time, we have multiple models that we are analyzing. Not to suggest that we're preying on the weak, but there's some assets that fit us very, very well that we believe consolidated into the Energy Transfer family would make more money. And that's just reality. [COO Marshall S. McCrea]'s point he made a minute ago, projects in certain areas feed other distributable cash flow of other assets. And that we've worked very hard to create this, and we're not done by a long stretch. So to answer your question, absolutely, we are modeling a lot of consolidation at this time."
Considering the amount of companies across the pipeline space in the United States, there are lots of opportunities for Energy Transfer to make an acquisition. The question is whether the company has the financial flexibility and corporate structure to incorporate multiple companies into the fold at once.
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